Do not blame governance for all organisational failure

There is a dangerous temptation to lay all scandal at the door of poor governance

In two of the major news stories from recent weeks, there is a strong focus on ‘governance’ in the commentary.

Both of these stories are covered elsewhere in this magazine in far more detail, but it struck me that in the case of both Carillion and Oxfam it is all too easy to write off their very different types of failure as failures of governance.

Rachel Reeves MP, chair of the Business, Energy and Industrial Strategy Committee, was quoted last week as saying: ‘Carillion’s annual reports were worthless as a guide to the true financial health of the company. The fact that it was impossible to get a true sense of the assets, liabilities and cash generation of the business raises serious questions about Carillion’s corporate governance.’

Meanwhile, other MPs are casting blame in different directions.

For example, Peter Kyle MP, a member of Ms Reeves’ committee, blames the auditor – telling the head of audit at KPMG: ‘I would not hire you to do an audit of the contents of my fridge because when I read it I would not actually know what is in my fridge or not.’

Resisting the temptation of musing on the contents of Mr Kyle’s fridge and why it might be complicated to audit, I wonder whether it is not so much Carillion’s corporate governance that is responsible for the lack of clarity in its accounts, or even any failings of the auditor or of accounting standards, but rather a disconnect between these roles and the press, public and Parliamentary expectation of them.

I recently re-read Chris Hodge’s excellent paper on the future of governance, ‘Untangling Corporate Governance’, which we published in February last year. One of his points was how, in the last 25 years, our definition of corporate governance has changed and what we see as its scope and purpose has broadened significantly.

‘In its introduction to the original code, the Cadbury Committee … defined corporate governance as “the system by which companies are directed and controlled”, and went on to identify the elements of that system in its definition of the role of the board: setting strategy, providing leadership, supervising management and reporting to shareholders on their stewardship,’ Chris wrote.

‘That relative modesty of ambition has long since been discarded … An informal definition of how we now think of corporate governance might be “everything that companies do”.’

That is not to say that there will not be governance lessons to learn from Carillion, but good governance relies on a complex balance of interconnecting responsibilities, and cannot and will not, of itself, always prevent corporate disaster.

Much the same can be said of the appalling allegations levelled at Oxfam. One of the challenges for a charity is always that of balancing the need to have a governance infrastructure in place, against the desire to fulfil its purpose.

These are often seen as conflicting priorities, as every penny spent on management, administration or infrastructure is a penny that is not being spent on relief, and the latter is the reason why donations are made.

But safeguards are necessary for a charity to fulfil that purpose. Oxfam’s 2011 report into allegations of sexual misconduct, which led to three resignations and four sackings, showed some disciplinary action was taken following the initial accusations, even if it later proved inadequate to the public’s eyes.

Reports were at the time made to the Charity Commission, but not in sufficient detail to allow a proper assessment of the issues. This hints, unfortunately, at an all too human attempt to cover up failure, something which is so often a feature of organisational culture.

Safeguarding is an important facet of good governance in any and all organisations. However, where an individual is committed to acting inappropriately or illegally, they will. The best policies and processes are ineffective if the organisational culture is not right.

This brings me inevitably to the Financial Reporting Council consultation on proposed revisions to the UK Corporate Governance Code.

The proposals are timely, but given some of the revisions are already a reaction to market failures – for example, proposals around stakeholder engagement stem from the government’s green paper and worries following BHS’ collapse – I am concerned that recent events create a risk of further regulatory activity.

I would like to thank all those who have taken the trouble to share their thoughts with us. ICSA’s formal response is discussed elsewhere on the site.

As always, I would be happy to receive any feedback or suggestions as to what the Policy team can do on policy@icsa.org.uk.

Peter Swabey FCIS is policy and research director at ICSA: The Governance Institute